1/09/2006 @ 12:00AM

Drive Fast, Drive Hard

Correction Appended

Download more TV shows, take more pictures, archive your life in high-def. And don’t worry about running out of storage space. Bill Watkins at Seagate will sell you more.

William Watkins is running late. The chief executive of Seagate Technology hustles through the tables at Birk’s Restaurant in Santa Clara, Calif., all apologies. He had to zip down Highway 101 at 85mph in his Aston Martin roadster to get here, risking his sixth ticket in a year. He yanks off his baseball cap, wipes the sweat from his brow and begins to rant about the changes shaking the computer storage industry.

“Everything is being disruptive and disrupted,” he says. “Disk drives have been a $20 billion market for five years. All of a sudden you’re going to see phenomenal growth–an extra $10 billion to $15 billion.”

Watkins wants that extra. His arms are bulging out of his blazer, and he is waving them around, banging his hands on the table so hard that everything on it shakes. “We’re taking everything analog and making it digital,” says Watkins, 53. “People want to be able to take their pictures, videos and music and move it around. To do that, they’re going to need a storage device. Seagate has a great opportunity here. We need to drive technology as hard as we can drive it.”

Seagate is riding the world’s gadget boom. Its 1-inch drives are the archives for cameras and MP3 players. Next year they are headed for cell phones. Slightly larger drives are going into Xboxes and TiVos and, starting next year, into the dash of your car. And before long there will be a big, honking Seagate terabyte drive in your closet or on your desktop, a trillion bytes, enough to hold half a million photos.

Seagate, in Scotts Valley, Calif., sparked the personal computer revolution 25 years ago with the first 5.25-inch hard drive for the PC. But drive manufacturers were always the ugly kids in tech. Excess capacity and ever-falling prices meant slim profits in good years and steep losses in bad ones. Seagate was so undervalued that it was taken private in late 2000 in a $2.1 billion buyout.

It is underappreciated no more. Retooled and relisted on the New York Stock Exchange in 2002 (the investor group reportedly made six times its money on the deal), Seagate is the biggest and most efficient stand-alone hard-drive maker in the world. Its $925 million net for the past 12 months was three times what its two nearest competitors earned, combined. Its revenue in 2005 climbed 21% to $7.5 billion, even as the disk industry saw its price per byte of capacity fall by 40%. For 2006 analysts expect sales to approach $9 billion. By redefining storage as a sexy, high-growth, high-return business, Seagate earns its title as the Forbes Company of the Year.

Storage demand shows no sign of slowing. Dollar sales of mobile and consumer drives, which are like miniature record players, with a tiny magnetized head moving over a spinning platter, will rise 15% a year through 2009, according to Gartner, on a tripling of volume (as measured in units). “One-terabyte hard drives will be standard repositories for movies, music and games in the home,” says John Monroe, a research vice president at Gartner.

Seagate has never been a household name like Sony or Apple nor even won the brand recognition that Intel has won with its “Intel inside” slogan. But it is aiming to be known as something more than an anonymous partsmaker. Its second mass consumer product, the 2.5- and 5-gigabyte Pocket Hard Drive, out last year, comes in the none-too-flashy color combo of gray and black. It’s a start.

“My biggest challenge right now is that we’re good. Good is your enemy,” Watkins says. “It doesn’t let you think about what else you could be. We need to be great.”

Seagate is in a technology race against flash, a variety of chip-based memory that doesn’t lose its bits when the power is turned off. Flash cards cost more than equally capacious disk drives but are lighter, faster responding and less power hungry. They’re biggest in little places: cell phones, iPods and digital cameras. Intel, Toshiba, Samsung and SanDisk dominate the $11 billion flash industry, up from $2 billion in 2002, according to Gartner.

The Top 10

Five-year annualized total return (%)

Apple Computer

49.8

Harman International

37.4

Western Digital

28.3

Harris

24.4

Seagate Technology

19.21

SanDisk

19.1

ScanSource

18.7

Amphenol

8.1

Canon

8.0

Benchmark Electronics

7.1

Flash could kill the disk drive by following the circuit-shrinking path of Moore’s Law. A 1-inch, 4-megabyte flash card costs $300 now, a bit more than what you’d pay for Seagate’s 1-inch microdrive, which stores 8 gigabytes. Come 2009, in the same space, flash will store twice as much for the same price. “When we achieve the function of flash with a comparable price to hard drives, the world will go to flash and the disk drive will go out,” says Eli Harari, chief executive of SanDisk.

That is, if Watkins stands still, which he most definitely is not going to do. His engineers are running out of easy ways to squeeze more bits longitudinally into the grooves of a spinning disk–so they’ve gone vertical, tipping magnetic blips on their ends (see graphic). Seagate will begin selling its first so-called perpendicular drive for notebooks in early 2006. By 2007 every Seagate disk will go vertical.

In a few years Seagate will let loose the HAMR, or heat-assisted magnetic recording. It uses laser and magnetic pulses to heat and widen the grooves where the bits get recorded. Combined with perpendicular technology, HAMR could theoretically multiply the capacity of today’s disk as much as 500-fold.

Further in the future Seagate hopes to score with a still hypothetical technology called Probe. Hundreds of nano-size wires, or probe heads, would stick out of one side of a microchip. The probes, charged with electricity, would slide back and forth under a second layer with the information on it. If it works it would produce a teeny drive with 12 times the capacity of today’s microdrives. Watkins has spent $100 million on Probe and expects to plunk $300 million more. “Probe may work, it may not,” he says, “but I’m not going to run from flash. I have to go after it.”

Seagate wouldn’t be able to make all these investments had it not undergone a radical transformation under the big-hearted leadership of Bill Watkins, who became chief executive in July 2004. This is a man whose idea of morale-building is taking hundreds of Seagaters to New Zealand for a few days of rappelling off cliffs. “He is the kind of guy you’d run through a wall for,” says David Wickersham, the chief operating officer.

Watkins is a storm contained only by his skin. In 1985, when he was working at a startup called Domain Technology, he got so angry in a meeting that he picked up a chair and threw it at the company president. Watkins wasn’t fired but got a lecture about controlling his temper. “I’ve always been too loud, with long hair, always a little too much of everything,” says Watkins. “I don’t inhibit myself.”

He continues to struggle with his emotions. In 2000 he hurled a cup of hot coffee at a senior executive after the guy publicly insulted the entire notebook division without having all the facts. He apologized for it but admits he would do it again: “We are going to fix issues as a team and be successful, or fail as a team.”

Watkins has had little stability in his life. His dad, a field manager in the oil business, kept the family moving every five years, from Venezuela to Canada to Wyoming, ending up in Texas. He went into the Army as a medic, assisting injured Vietnam vets at a base in Missouri. Watkins then got his political science degree from the University of Texas, earning money on the side as a guard on the graveyard shift in the mental ward of a Lubbock hospital, restraining patients who tried to attack the nurses.

He hitchhiked his way to California for a girl. He got a temporary job at Xidex, a Silicon Valley floppy disk maker, and decided tech would be his life. More-senior jobs followed at Domain, a drive-component maker, and Conner Peripherals, a hard-drive manufacturer. When Seagate bought Conner in early 1996, its then chief executive, Alan Shugart, gave Watkins responsibility for its four drive factories.

Watkins and other executives remember it as a brutal, divisive place to work. A prior chief executive showily kept a grenade on his desk. Executive meetings were rife with four-letter words and personal attacks. The one who yelled the loudest won, and the loser was sent away with a stuffed-dog head.

But Watkins was quietly planning for the day he would be in charge. He thought about what Seagate could be, not what it was. In 1997 he started talking about revamping manufacturing. He wanted to make any drive on any line in any factory, his vision of the “factory of the future.”

At the time, Seagate had dedicated lines in four factories for each of its seven different flavors of 31/2-inch drives. Each product had its own designers and engineers who built according to their own needs, and each line had 35 workers who assembled 800 drives daily. “I wanted to know why we couldn’t do 2,000 drives a day with no employees,” says Watkins.

He brought several engineers from around the world to Minneapolis to find out how many parts could be shared in more than one drive. Answer: 2%. Watkins lost it. He threw the parts on the conference table and yelled at them: “If you tried to find nothing in common, you’d have come up with more than this!” He told them it was unacceptable; they had to do it again.

The engineers started with the simplest of parts–screws–and whittled those down from 61 screws for 7 same-size products to 19 screws for 29 products in three sizes. Eventually they worked their way up to the intricate heads that write data onto the disks. Today every one of Seagate’s products has at least 75% of its parts and machinery in common with another. Every one of Seagate’s products can be built on any of its lines in any of its factories, using the same robots and machinery; each line produces 17,000 drives per day.

Watkins’ efficiency gains won him the job of chief operating officer in 1998, and the manufacturing revamp allowed Seagate to shut a factory and cut staff over the years from 119,000 to 46,000.

Despite the initial efficiency gains Seagate’s cash flows remained too sporadic for most tech investors. All it had going for it was a 33% stake in go-go storage software firm Veritas, worth $22 billion in March 2000. Seagate’s entire market value was then a mere $16 billion, valuing its $6.4 billion (revenue) drive business below zero.

Silver Lake Partners, a private equity firm in Menlo Park, spotted locked-up value. In November 2000 it led an investor group and Seagate’s management into a complex deal in which Seagate shareholders got Veritas shares, and the group got the drive business from Veritas for $2.1 billion.

Silver Lake retained Stephen Luczo as chief executive and shortly after made Watkins president. Freed from the critical eyes of Wall Street, they were able to spend their way out of the doldrums, betting on unproven technologies like perpendicular drives, HAMR and Probe. R&D spending began ticking up, from $200 million in 1998 to this year’s $700 million–twice the level of its two biggest foes combined.

When Seagate relisted on the NYSE in December 2002, it was already in the process of becoming a far more nimble company. Three years ago it cost Seagate $80 million to develop a new drive. Today it’s less than $20 million.

Its skill at navigating the iPod craze is a glittering example. In early 2004 Hitachi was making 1-inch, 4-gigabyte drives for the iPod Mini. Apple couldn’t get enough, and it became one of the biggest buyers of Seagate’s 1-inch drive. Then Apple announced in September that it was jettisoning the Mini in favor of the Nano, which uses flash instead of a hard drive. The press declared the inevitable death of disks. Hitachi, which declined to comment, saw its 1-inch production volumes plummet. Seagate was able to repurpose the line to build 2.5-inch notebook drives and 3.5-inch desktop drives.

Dick Conrad, head of HP’s supply operation, says Seagate’s ability to roll with fickle demands is the main reason HP does so much business with Seagate, accounting for 18% of Seagate’s revenue. “They just turn on a dime,”he says.

Seagate’s destiny is, for the foreseeable future, in the hot hands of consumers. To win them over, this manufacturer has to learn new marketing skills. Brian Dexheimer, a 16-year veteran at Seagate, runs sales and marketing and the consumer products unit. In July he and Watkins divided everyone up by customer group instead of region and brought in some talent from TiVo and Microsoft. They will amp up ad spending 80% to $50 million in 2006. “Our products don’t yet have a common language,” says Dexheimer. “You look at any Apple product, and you know it’s an Apple. We want to have that same kind of brand connection.”

What about the inexorable, exponential decline in the price of storage? Is Seagate doomed? Not at all. In the half-century since IBM introduced the Model 1301 disk storage system, the price of storage has fallen in real terms by a factor of 60 million. But the world’s thirst for storage is keeping up the pace.

I need my personal space

Seagate now makes 29 kinds of drives, an ambitious effort to diversify away from slow-growth sales for servers and PCs and reach the world of consumer electronics.

computer drives

Barracuda 500GB
$430

Cheetah 73GB
$530

Perpendicular Technology Laptop Drive (due in 2006)
160GB
$325

consumer drives

Pocket Drive 5GB
$100

Backup Drive 400GB
$360

Portable External Drive 100GB
$220

Compact Flash Drive 8GB
$260

Digital Video Recorder 500GB
$NA

Videogame up to 40GB
$NAv

Automobilebr> up to 40GB
$NA

flipping for capacity

Hard drives get roomier by squeezing more bits closer together on a spinning magnetized disc. But cramming them lengthwise eventually leads to magnetic chaos. Now comes perpendicular recording, in which the bits magnetic orientation is flipped upright, safely edging them closer together and effectively doubling capacity. Seagate will debut the first perpendicular drives in 2006.

Jan. 30, 2006 This story stated that a 1-inch flash card costing $300 has 4 megabytes of memory. Its capacity is actually 4 gigabytes.